Who should lead the delivery of digital financial services?

There’s an ongoing debate on who should be licensed to deliver/lead the digital financial services race, especially mobile money operations. At the moment, we have three interested parties: i) independent Mobile Money Operators (MMOs); ii) deposit money banks (DMBs); and iii) mobile network operators (MNOs).

The current licensing guideline permits MMOs and DMBs to lead and run non-bank led and bank-led models respectively. However, while MNOs are permitted to forge partnerships with licensees, they are prohibited from leading mobile financial services.

However, there is a strong argument for a cross sectional mix of the three in order to drive financial inclusion.

First of all, let’s restate the magnitude of the problem that lies ahead of us.

The problem: Nigeria has over 40 million adults living day to day without access to financial services. Nigeria has a target of crunching exclusion to an all time low of 20 percent by 2020.

Financial services sector capacity: With 24 providers and a total combined network of about 6000 branches, banks have been able to successfully onboard 31.4 million unique individuals into the formal financial service ecosystem. At the moment, banking services are the entry point into the financial services ecosystem with bank accounts being the metric unit of financial inclusion. Notwithstanding banking’s position as the dominant financial services provider, the ecosystem includes insurance, pensions and investments.

In comparison to the establishment of bank branches, the advantage of mobile money operations is that extending it via an agent network requires relatively less capital. Globally, mobile money has championed financial inclusion efforts because it runs on a cheaper and flexible model that thrives in even rural and remote areas, provided telecommunications services exist. So far, our licensed mobile money providers have acquired 3.8 million mobile money customers, many of whom are already formally banked.

Together, these two provider segments – banks and MMOs – have been able to reach about 41 percent of the population with another 10 percent being served by informal providers like thrift collectors, alajo and esusu. Since 2012, there has not been any significant progress in financial inclusion as the rate of inclusion seems to have plateaued and even receded slightly between 2014 and 2016. Teaching us an important lesson – not only do we have to get access to people, but we have to keep them transacting by providing appropriate and relevant products and services.

Then we have the Mobile Network Operators aka telcos who are not only actors in the financial inclusion equation, but have dominated the industry in other markets. Their telecommunications network are the rails upon which mobile financial services function and both entities – the banks and the MMOs – employ in the services to customers.

Which model works best, bank-led or telco-led – or a hybrid, where banks, telcos and independents play separate and non-overlapping roles? That’s a debate for a future article. But the financial inclusion mandate we have is quite clear. That is, enabling poor people access the financial services they need to improve their lives and escape the scourge of poverty. In a country like Nigeria where so many people live excluded from financial services, if we remove mobile services, the number of excluded people would shoot up further. So it’s not about banks or telcos: the key issue to keep at the fore is how do we transform lives?

Which brings us to the original question albeit with more context. Seeing as financial inclusion has plateaued, and there is still a ticking clock on the national strategy, who should lead the delivery of DFS?

It is not as though, telco participation is a magic bullet to financial inclusion. There are additional market facing barriers. Allowing proper telco participation will solve only one of these which is access (and even that is not an easy feat as resources would need to be deployed into the development of agents through conversion of existing retail stores and franchises, and mass rollout of additional service points). There still remain several other barriers – affordability, agent liquidity, awareness and so on (see our 2016 State of Market report for an exhaustive list).

Ironically, even if telcos were suddenly allowed to lead mobile money operations, the agents at the edge of the market would still need banks for their liquidity needs. Seeing as the majority of transactions agents facilitate is cash in, cash out (CICO), when an agent runs out of physical cash but has e-money on account, s/he would head to the bank to get more cash or rebalance. Whichever way we look at it, we still need collaboration to fulfil our collective agenda of inclusion.

In short, the blend of models and solutions has to be right, and that can only be achieved through real world evidence-based research and experimentation. The best scenario for progress involves synergy and collaboration. All three players have strengths and advantages acquired over time which would benefit the ecosystem in our quest to quell high financial exclusion.

The truth remains, addressing financial inclusion in Nigeria is a Herculean task and taming the monster requires all hands on deck. If our benchmark series (which we published several weeks ago) taught us anything, it is that there are several ways to skin a cat. What worked for country A is not guaranteed to work for country B, but we won’t know until we start trying. After all, in this age of digital, the mantra of success is – fail fast and fail forward.

It’s a brave new world. Technology companies such as Amazon, Alphabet Inc, Alibaba and Facebook/WhatsApp have already begun creeping into the financial services space. And it seems to be a global movement.

So the answer to the question of who leads DFS delivery is – everyone. Banks, MMOs and telcos. We need all hands on deck.

Olayinka David-West and Ibukun Taiwo

Olayinka David-West and Ibukun Taiwo are members of the Sustainable and Inclusive Digital Financial Services initiative of the Lagos Business School